Spring 2011 Midterm 2 Solutions

Spring 2011 Midterm 2 Solutions - Solutions to Midterm II,...

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Solutions to Midterm II, FIN 350, Spring 2011 Form Answer Form Answer A B A B 1 2 D 14 15 A 2 4 E 15 16 C 3 5 A 16 14 A 4 1 C 17 18 A 5 6 B 18 17 C 6 3 C 19 19 C 7 8 A 20 20 B 8 9 B 21 22 A 9 7 A 22 24 B 10 10 D 23 21 D 11 12 B 24 25 B 12 13 E 25 23 E 13 11 C 26 26 E Solutions: 1. Solution: . FCF model for valuing stock Answer: d Firm value = $25,000,000/(0.10 – 0.07) = $833,333,333. This is the value of the whole company, including debt, preferred stock, and common stock. From this, we subtract the $200,000,000 in debt and preferred stock. This leaves an equity value of $833,333,333 - $200,000,000 = $633,333,333. So, the price/share = 000 , 000 , 30 333 , 333 , 633 $ = $21.11. 2. Preferred stock concepts Answer: e MEDIUM 3. Preferred stock yield Answer: a Annual dividend = $0.50(4) = $2.00. r p = D p /V p = $2.00/$20.00 = 0.10 = 10%. 4. . CAPM Answer: c MEDIUM Risk-free rate 7.00% Old market risk premium 4.00% New market risk premium 6.00% Old required return 13.00% Beta 1.50 New required return 16.00% 5. Standard deviation, historical returns (sample SD) Answer: b HARD
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Deviation Squared from mean Deviation 2005 25.00% 10.00% 1.00% 2004 -10.00% -25.00% 6.25% 2003 30.00% 15.00% 2.25% 15.00% 9.50% Sum sqd deviations 4.75% Sum / (N-1) σ = 21.79% SQRT of above This is a relatively technical problem. It should be used only if calculations are emphasized in class or on a take-home exam where students have time to look up formulas or to use Excel or their calculator functions. 6. Beta coefficient Answer: c MEDIUM 7. Portfolio risk and return Answer: a MEDIUM 8. SML Answer: b MEDIUM 9. Market risk Answer: a MEDIUM 10. CAPM and required return Answer: d r RF = r* + IP = 3% + 5% = 8%. r
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This note was uploaded on 11/11/2011 for the course FIN 350 taught by Professor Chen during the Spring '07 term at S.F. State.

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Spring 2011 Midterm 2 Solutions - Solutions to Midterm II,...

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